Six Steps To Stress-Free Freelance Finances

What scared me the most when I abruptly went freelance was the unpredictability of pay. The dreaded feast and famine and delayed invoices you hear about. In the first few weeks, I was constantly checking my bank balance and scribbling calculations on bits of paper to figure out if I had enough to cover the rent. The most frustrating part was that when I looked at how much I was billing each month, it was more than enough to live off but it wasn’t in sync with the monthly cycle of recurring bills.

Inspired by my hero Martin Lewis and his piggy banking system, I decided to open a second current account (that’s a checking account for the Americans). It took a while to get this all set up but it was seriously worth it.

Here’s my six-step guide to how I got my freelance finances in order.

1. Figure out a monthly budget
The most painful but necessary step is figuring out your budget. I calculated how much I need to live off (rent, bills and fun money) plus extra for savings (unforeseen expenditures, holidays and tax). Again, Martin Lewis is a great resource for budgeting tips. I’m also a fan of US-based The Financial Diet YouTube channel. Another simple way to do this is by using a previous salary as a guide. Whatever method you use to manage your finances as a freelancer, you pretty much have to do this step because you need to know the minimum you have to earn to live the kind of life you want.

2. Open a second account
Open up a second current account. I went with First Direct because they have no fees and offered some really good savings accounts tied to the current account. Again, Martin Lewis’ site has a detailed rundown of the best current accounts. Or in the US, Nerd Wallet is great.

If you’re in the UK and super savvy, you can make use of the government initiative that makes it easy to switch current accounts; many banks offer a cash incentive of up to £200. However, you’ll then need to open another account as you'll need two in total and to get the bonus the first account will be closed down.

A note about business bank accounts: In the UK if you are a sole trader, you are not required to have a one (the rules are different for limited companies). While business accounts typically incur fees, there are lots of reasons you might want one as a sole trader, and of course, this system should work just fine with a business bank account. Personally, I decided not to open one as when I set all this up, I was still finding my feet and committing to a business account didn’t make sense for me.

3. Set up the accounts
I use one of my current accounts to collect all my income. It’s the one I put on all my invoices so that all my income comes into it. I also use it for any tax-deductible travelling, which I put on the account’s debit card, to make it easier to keep track of these expenses. Freelance writing doesn’t really incur many expenses beyond travel, some software costs and the occasional coffee so this works fine for me.  

The other account is for my daily banking. I pay my personal credit card and rent from here, as well as using it for taking out cash. I also use this account to funnel into my savings accounts (more on that in step five).

4. Set up some standing orders
This is where the magic happens. Using the budget you set for yourself, set up a standing order from your income account to your daily banking account for that amount. And now you have a monthly salary. Protip: set it for the day before your rent is due.

Then I also have a couple of other regular transfers set up between my daily banking account and my savings accounts to separate out the money I use on a regular basis and the cash that needs to be squirrelled away. In theory, what you should be left with is enough money each month to know that your rent and personal outgoings are covered, as well as buffers should the unforeseen happen.

NB: Any extra money in your income account should be left untouched! This system is designed to take into account the peaks and valleys of your income, so on months when you’ve earned more, you will be building a buffer for the months when you’ve dipped.

5. Sort out the savings accounts
I have four savings accounts. Three are tied to my daily banking account and one is tied to my income account, but you can also open totally separate accounts.

One came with my First Direct account and gives you 5% interest if you make monthly deposits for a fixed 12-month term. That’s where I keep my tax money (funnelled monthly from the daily account via standing order).

Then I have an account for holidays and/or sickness (another standing order); and one for long-term savings (this one I pay into when I can, yes I know that’s not a good tactic).

Lastly, I have an instant-access savings account that's my buffer for any points when I really don’t have enough to pay my “salary”. I don’t pay into this account regularly because I have both the holiday/sick pay fund and a long-term savings fund for any major emergencies, so I just keep it at a set minimum, which is one month’s wages.

6. Keep on top of your accounts
In the first few months, I had to keep a close eye on the accounts, but now I’ve got into a nice rhythm and it pretty much takes care of itself. I do my invoicing once a week and have started doing quarterly financial check-ins to make sure everything is all on track, especially in regards to the tax account which is based on a forecast so needs to be regularly reviewed. Wow, that sounds nerdy. It’s probably best I stop talking about finances now.

Disclaimer: The above information is based on my own experiences. I am not a financial or tax adviser; I’ve done my research for my particular situation (a sole trader based in the UK), but you should also do yours.